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“Exciting times ahead” for real estate sector

Interview - March 31, 2014
The Real Estate and Housing Developers Association boasts a membership of over 800 developers across the nation who are responsible for some 80% of the total real estate built. Talking to PM Communications, President of REHDA Datuk Seri Michael Yam evaluates how the industry is evolving as Malaysia develops, its massive potential for growth and how it is facing up to some its challenges such as ensuring sustainability
Considering that the AEC (ASEAN Economic Community) will be established in 2015, what do you think will be the impact of the establishment of a single market on the real estate sector in the ASEAN region as a whole?

Perhaps you can consider the European Union as a template for the ASEAN region. ASEAN is not new. There has been a process of standardization or harmonization in trade barriers and other related agreements. Nevertheless, on a quantification basis, if you look at every single country in the region, no one probably has got the economies of scale that we should be aiming at; but if you consider ASEAN as a whole we’re talking about a region whose population sums up to 600 million individuals, which is huge. The growth rate of each of the member countries does not equal that of advanced economies but in perspective it seems to have a bright potential. The GDP per capita may not seem so high, however from a socio-demographic perspective the vastness of our population suggests there is a tremendous market potential, which will consequently increase both GDP and purchasing power. The other aspect to take into account could be the population diversity, which is exciting from a social and cultural aspect. We have been clustering in a single region for some time now and we may even look alike, yet there is diversity in terms of languages and culture. Major differences among all the countries can determine where other countries decide to carry out operations and place investments.

Malaysia is strategically and geographically positioned to become the perfect oil and gas hub. Also, it is the worldwide leader for Islamic finance. What do you think is the potential for Malaysia to become a hub for real estate development as well?

I think they will grow in tandem. This country is blessed with crude oil rich resources. Of course, oil and gas are precious commodities because where you find oil and gas you find development and growth. I think we’re very fortunate together with Indonesia and Brunei to be able to count on a tremendous reserve of oil and gas. It is a sector that does attract foreign investments, exploration and encourages an expatriation flow. The Islamic financial sector that is registering a tremendous growth and it has a multiplying effect in terms of positive spill overs that can bring in a lot of talents. This migration of talents is going to need a shelter above their head, so if they don’t buy and invest on property they will need to rent and will consequently represent an income source for the property owner, prompting real estate to blossom. So the potential growth is as tremendous to the estate developers as it is for the investors’ returns.

What do you consider as the milestones in the development sector in Malaysia for the past decade? How do you think the sector has evolved?

I think Malaysia’s growth pace has been very steady since the ’97-’98 crisis, and then the years ’98-’99 represented some sort of watershed for the region. The Asian financial crisis was almost a black swan: nobody knew what was coming nor how to deal with it. So in 2000 our growth was very strong again, fast and resilient as much as when the Lehman Brother’s crisis happened in 2008 we were hardly affected because we were financially solid. Thirteen years later we are much stronger, we have better financial performance and we came up with much better products. In America or Europe the crisis is lasting longer - especially in the Euro zone - maybe the body is still carrying those viruses but everything is kept under control. However, this is why there is more interest in Islamic finance. It carries less risk and our projects are viable and sustainable.

REHDA represents more than the 80% of all the real estate developers here in Malaysia. Could you please share with the readers of the Daily Telegraph what was its genesis? How was REHDA set up and what has been its contribution to the real estate development sector?

If you tick the clock 57 years back to when we gained the independence and what was available in the housing stock then - I think the country had a population of about 7 million individuals - there were 6/7 people living in a household because there were maybe 1 million houses available, which was not much. But as the economic growth went on, the population obviously increased and consequently there was a higher demand for housing. At the beginning people looked for basic shelter but as they grew richer they preferred modern solutions. Today the country’s population is estimated at 29 million and since they have a lot more money in their pockets, rather than looking for basic shelter, they are adjusting to a modern lifestyle in terms of homes as well. So, as an industry, we have to grow to match the demand requirements but as development grows, the government is highly aware that there needs to be some regulations otherwise there will be only one-chance development allowed. The issues at stake are of major importance: planning, water supply, electricity, upstream services and also even fraud could happen. So the government come up with a Ministry that oversees housing activities and legislation. In the early 70’s, since the government machinery was looking at regulation in the housing supply chain, the private sector needed another board coming from outside to engage government so that it was not one-sided. An NGO - very British style - was established and it was called the Housing Development Association Board, which the developers found very useful. Subsequently, this association evolved into the Real Estate and Housing Development Association because from just housing, it started getting involved in other projects like shopping malls and hotels. We are now recognized as the official representative board for the real estate industry, therefore before any legislation is passed we are consulted from the policy makers. This is important for two reasons. First, if you come up with a legislation or regulation, which is impractical, it will have a negative impact on the development industry. Secondly, as a contribution to the GDP of the country, we were able to grant a 5% growth contribution. Today we directly employ about a million people, as associated industry we are quite substantial and we impact more than 140 upstream and downstream industries. Everything has to do with the real estate; the moment you walk in anywhere, the suppliers, the chairs, the curtains, the lighting, all these components are part of the industry.

Sustainability is one of the crucial challenges you will have to face in your sector. We had the opportunity to interview Mr Zahari from MAESCO and we got a very in-depth perspective of how that association is trying to promote energy efficiency. So how is REHDA promoting this trend of sustainable development within its members in Malaysia?

The ideal is that each and every consumer out there subscribes to green energy. Unfortunately, it costs more money or at least it does in this specific moment. Moreover, the payback of green energy investment it is not as immediate and some people may not believe in it. When I say ‘costs’ I refer to the initial capital cost of it, but if you are a little bit smarter you consider the lifecycle costing which involves the initial, the implementation and the maintaining capital invested which means that in a few years’ time the energy supply will be cheaper. However, on average, people will not bother about the 50 years ahead because maybe he won’t live in the same house for 50 years but only for 20 and then move to another house. We believe in green and we believe it so strongly that we have actually initiated a green rating tool, called GreenRE (real estate) that is a non-profit initiative and we want our members - the developers - to subscribe to it. The only thing members are required to do is to pay a registration fee, which is cheaper compared to the higher entry costs of the other rating tools. When that step is completed we move on with the assessment measures, make sure the building meets the criteria required and finally the member gets the certification. We want our members and the consumers to embrace a green policy. We go to a normal unit housing and encourage them to go green telling them it is really not expensive; the developer should also advertise that this policy is promoted by his own association, which is non-profit. So to answer your question, REHDA believes in green, as much as we set our own initiative, a green rating tool, to make it become affordable even to the most basic houses.

One thing that both the private and the public sectors have clear in mind is that knowledge is power. The public sector has been pouring millions of funds in order to improve human capital skills. What are the current human resources and training programs that you are implementing with REHDA for your members?

Well, interestingly enough REHDA indirectly contributed to this objective. In Malaysia, there an organization set up for this sector called the Construction Industry Development Board (CIDB), which is very similar to CIDB in UK. Its main task is to promote the construction industry and one very important element is actually to improve people’s skills in the sector by training them properly. For every project over half a million ringgits, the developers through the contractors pay a quarter of 1% of the contract value to our fund, which is managed by CIDB. Therefore, the training resources are centralized at a federal level by a structured body. If you can imagine, the housing industry – I’m not even talking about the commercial sector or the shopping retailers sector but only the construction side - is worth 20 billion ringgits. So it is under the authority of CIDB the objective to improve employees’ and members’ skills, train and improving quality of human resources. What REHDA does is trying to improve the business skills of our members by organizing trainings on more current trends on a weekly basis, on GSD training to match latest accounting standards and on FRS (financial reporting standards). We merge them into the latest technology and we work more on a management level. These are some of the benefits of REHDA membership.

Talking about UK-Malaysia relations, SP Setia and Sime Darby have bid successfully on the development of the Battersea power station and that will represent a milestone in the relations between the two countries. What do you think are the crucial factors behind these successful Malaysian stories?

Don’t forget it’s almost 6RM to the pound. I remember 2 years ago it was 6.70 ringgits to the pound. I’m about to go into the UK now because it’s about 5,40 ringgits to the pound. No way you can make money to cover that 2-ringgit difference, so it’s all strategy about currency. To me, when you go overseas, you need to look at various risks as well as country’s assets. Make sure there’s not an unstable government or a weak banking system; presence of a good legal system, money has to be easily changeable. So I see this Malaysian venture in the UK positively. You have to put your money where they can grow and get higher returns, so SP Setia and Sime Darby have looked at gaining exposure and went overseas by picking London as the place to be. London is a city that everybody knows and loves and a place you go to when you want to learn the language. I mean, I wouldn’t go to Ibiza. You have forgotten another part in this venture, which is EPF, the 6th largest sovereign fund in the world representing 120 billion pounds. I’m not sure whether it is a coincidence but I suspect that EPF may have had some interest in going into real estate in London. They have bought three buildings in the UK worth easily 200 million pounds. Why were they allowed to go and invest in the UK? EPF is a State fund so everyone contributes to it and it is controlled by the Parliament, which only three or four years ago gave permission to invest up to 20% of EPF money offshore. Previously, when they were not allowed, EPF simply bought stock market in our stock exchange and with a 120 billion pounds they could corner the market. Our stock market is valued a 1.2 trillion ringgits where EPF asset is 600 billion. So how could foreign investors invest in Malaysia if there was no liquidity? So the government had to make EPF evolve and liquidate some of the shares in order to allow outside money to come in. So EPF has still capacity to invest in the UK, not necessarily just in property – which represent not even 1% of the investments – because if you understand how it works, investments returns from property is too slow for a lot of people. They are not going to wait 10 years for capitalization but I can guarantee that if you buy a property here, every 7 to 10 years it doubles. However, for some investors the return is too slow so they prefer to invest in the stock market. Within two weeks you can gain a 10% and you resell that 10% on your original investment multiplied by the number of weeks, which really looks good on your performance. The easy thing would be to follow the golden rule: to invest one third in the estate, one third in the stock market shares and one third cash. But that one-third in cash is not good because at a 3% inflation rate the real value of money lowers sensibly.

There is this interesting research carried out from the Pramerica Real Estate Investors Research, which states that globally the UK ranks 6th in the list of the contributors to global growth in the commercial real estate. By looking at the trends, both globally and regionally, Kuala Lumpur is one of the booming markets with good prospects and steady growth in the years to come. What do you think are the main benefits or why should multinational corporations or corporate businesses from the UK invest in KL?

We simply like to think that Kuala Lumpur should be the gateway for any investors and not just British multinational companies into this region for many reasons. To begin with, we are genuine English speaking people; the rule of law is very clear; we have a very strong banking and financial sector, which allows borrowing from foreign countries; and it is easy to do business. If you look at the pricing rates in the English speaking areas of the region we are competing only with Singapore and Hong Kong. Our commercial rental rates are so affordable it’s almost silly; we are talking about less than a pound per square foot compared to Singapore where the price is easily 3 or 4 times higher. If you expatriate and need to rent a place, it’s way cheaper here and the properties are provided with best comfort facilities including gyms and swimming pools. International schools are another good reason. Again they are cheaper here and the quality is comparable to other countries. It is as good as home at a 20% of the price with the sunshine, and you can play golf all year long!

What do you think are the future prospects of the relations between UK and Malaysia?

I think the relations are as healthy as they can be. To some extent London has rediscovered Malaysia and, looking at the almost flat growth in Europe, I can certainly encourage flow of trade between UK and Malaysia. One good piece of news is that some of the milestones of the ETP set up by the government have been quite commendable. One of the 10 key areas in particular is what they called the Greater Kuala Lumpur/Klang Valley plan and within it there are several components where the British companies tried to get involved attracted by projects such as the high speed rail. There is one organisation called Invest KL, which is a government trade promotion agency focusing on Greater Kuala Lumpur. The industrial aspect is being dealt with by MIDA, a very successful agency, which realised that Greater Kuala Lumpur cannot have factories and industries as it is too urbanised. What are we looking at, then? A city that works as a city with a decent liveability indexes. So Invest KL is working in order making it look more attractive and lure multinational companies into starting operations here instead of Singapore, Jakarta, Hong Kong or Manila. It is proving to be successful, bringing 10 multinationals every year. Some British companies set up some offices here to process payroll and talent recruitment for this region; Lumberjack is an example.

As the face of the very successful real estate development sector here in Malaysia, and as you said the sector has contributed to such an economic growth, employing millions of people, how do you imagine Malaysia post Wawasan 2020?

Probably I have underestimated what every social and physical study had planned about ASEAN cities’ growth. Even in the more advanced, developed countries we wouldn’t have thought that the world population would reach 7 billion people, more than 50% of which has grown in urban areas. Twenty years ago this situation would have been unpredictable. Looking at Kuala Lumpur, it is bursting in terms of traffic injection and population growth. The projected growth is estimated to increase from 6,5 to 10 million. So because of that the housing demand is going to be tremendous, there are going to be capacity issues challenging suppliers. Our population is growing of about half a million individuals per year, which is the same growth as the UK that has got three times our population. On a population of 60 million individuals, the UK has got 26 million houses, we as a country count on a population of 29 million individuals and we only got 4,5 million houses so you can see real estate development potential. Therefore in terms of population growth we have additional demand for housing and we have also moved from the Asian value of extended family to the Western-like concept of nuclear family that means the demand for smaller units is going to increase proportionally. More housing will be required because expectations on the quality of life is going to be demanding, smaller size units will be more popular so we will have to work on rules and regulations. We will certainly be able to keep up with the trend although now it is moving faster than legislation. So we are definitely going to have exciting times ahead.